UPDATE 3-Investors dump South Africa's Abil bank as problems mount

(Recasts with retail business rescue, adds comment from
economist and lawyer)

By David Dolan and Ed Cropley

JOHANNESBURG Aug 7 Investors fled African Bank
Investments on Thursday, as the South African lender
faced a $790 million hole from a flood of unsecured loans gone
bad and its furniture retail business applied for creditor
protection.

The bank, widely known as Abil, shocked the market on
Wednesday when it said it needed to raise 8.5 billion rand ($790
million) in new capital after warning of a massive annual loss,
after which its chief executive quit.

On Thursday its furniture retailing arm - which Abil
acquired in 2008 in a disastrous attempt to sell sofas on credit
- applied for temporary protection from creditors.

Any attempt by the bank to raise the funds to survive looks
near-impossible - Abil needs several times more capital than it
is currently worth. Its stock plunged to a record low of 20
African cents on Thursday and ended the day at 50 cents, valuing
it at $102 million. It was a precipitous fall for a company
worth more than $2 billion at its height.

"Equity investors have thrown in the towel. It's literally
uninvestable," said one Johannesburg-based trader, who declined
to be identified. "The South African consumer credit bubble has
burst."

The bank's troubles stem from its reliance on unsecured
lending - high-margin loans not backed by collateral - which it
marketed aggressively to low-income borrowers. But those clients
have been hit by rising unemployment, food and fuel costs, and
Abil has been slammed by their bad debts.

South African Finance Minister Nhlanhla Nene said he was
"keeping an eye" on Abil, but said there was no sign of broader
contagion to the banking sector, which is widely regarded as
being well capitalised and sound.

"There has been no indication that other South African banks
have been affected negatively by Abil's trading update, which is
our major concern," he told reporters.

"UNIQUE BUSINESS MODEL"

South Africa's central bank said on Wednesday that the
problems at Abil were largely due to its "unique business model"
- it is closer to a payday lender than a traditional bank and
relies on bond markets, not deposits, for funding.

While Abil's problems were unlikely to have a direct impact
on the rest of the country's banking sector, regulators were
likely to act quickly to stave off concerns for its peers, said
Kevin Lings, chief economist at Stanlib.

"There may well be some support, in some form," he said.
"The support would be highly conditional and it would either be
looking to help it as a going concern or looking to wind the
entity down."

In recent years South African banks turned to unsecured
credit - such as personal loans - to offset weak demand
elsewhere. But most commercial banks have reined that lending in
as weaker economy prompted more customers to default.

There was no sign of panic at an Abil branch in the working
class Johannesburg neighbourhood of Randburg at midday on
Thursday. There was even a small trickle of customers coming
into the branch to fill out new loan applications.

"Everything is fine, it's business as usual," said the
manager, who declined to give her name.

Posters in the windows of the branch advertised mobile phone
deals with new loans. "Credit that works for you - apply today,"
one read.

Godfrey Mashele, a 38-year-old employee of a mobile services
firm, said he intended to keep paying off his 3,000 rand credit
card debt regardless of the news.

"I've heard they've lost money with their customers not
paying. But I'll be carrying on paying down my debt, it's on a
monthly debit order," he said.

BUSINESS RESCUE

Abil's furniture retailing arm said on Thursday it had
applied from temporary protection from creditors, or "voluntary
business rescue" under South Africa's Companies Act.

The process allows a company that still has commercial
prospects an opportunity to potentially rehabilitate itself,
said Brandon Irsigler, a director at law firm Norton Rose
Fulbright.

"This is a middle path between debtors not being able to
recover their money and forcing an otherwise viable business
into liquidation to the detriment of everybody," he said.

Leon Kirkinis, who resigned as Abil's chief executive on
Wednesday, built the bank into one of South Africa's best known
lenders by targeting low-income borrowers with expensive credit
- a previously untapped market of people who had been
traditionally ignored by banks during the apartheid era that
ended in 1994.

But critics said those lending practices were unsustainable.

"The question now is how much the loan book is really worth
and if that is enough collateral for equity holders after the
bond obligations have been fulfilled." said Nic Norman-Smith,
chief investment officer at Lentus Asset Management in
Johannesburg.

"Based on the current equity valuation, the market is saying
that there will be very little - if anything - left."

Abil said on Wednesday it would cleave off its bad loans in
an attempt to create a ring-fenced "good bank".

Its bad loans comprise nearly a third of its 60.1 billion
rand book, while it had 47 billion rand worth of bonds and
long-term debt on its balance sheet as of the end of March.

The Johannesburg Stock Exchange said it saw no reason to
halt trading of Abil's shares "at this moment".
($1 = 10.7310 South African Rand)
(Aditional reporting by Wendell Roelf in Cape Town and Stella
Mapenzauswa in Johannesburg; Editing by Sophie Walker)

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